May 7, 2009 / 1:02 PM / 11 years ago

UPDATE 3-DirecTV profit falls, subscriber growth raises costs

* Q1 EPS $0.20 vs estimates $0.32

* Q1 rev up 7 pct to $4.9 billion

* Added 460,000 U.S. subscribers

* Sees adding more than 1 mln net subs in 2009

* Shares down 1.4 percent (Adds analyst’s comment, outlook, background)

By Yinka Adegoke

NEW YORK, May 7 (Reuters) - DirecTV Group’s DTV.O said on Thursday its first-quarter profit fell due to an increase in spending to attract and retain subscribers.

The company beat analysts’ expectations by adding more than 460,000 U.S. customers, well ahead of its own forecast for around 275,000 net additions, because of more aggressive marketing, the launch of a partnership with AT&T Inc (T.N) and the U.S. digital TV transition.

The U.S. satellite operator raised its 2009 net subscriber growth outlook, saying it now expects to add more than 1 million new customers. The company is based in El Segundo, California.

Analysts had expected its growth to slow in the face of the U.S. recession and stiffer competition from cable operators and Dish Network Corp (DISH.O).

DirecTV shares fell slightly as investors worried that the company had discounted heavily to win new subscribers and retain existing ones leading to average revenue per user growing by 0.8 percent and hurting its bottom line.

There was also uncertainty about DirecTV’s plans to combine with some media assets owned by parent company Liberty Media LINTA.O to create a new larger independent company that would still be called DirecTV and led by current Chief Executive Chase Carey.

“The weakness in the slowdown of the ARPU and questions about the Liberty transaction and what that means for strategic M&A is hurting the shares,” said Gregory Lundberg, an analyst at Communications Equity Research.

“What’s going to happen to all that beautiful free cash flow they’ve had until now?”

DirecTV’s huge number of new subscribers meant its customer acquisition costs, such as new installation equipment, hurt its bottom line. The company said profits were also hurt by a rise in depreciation expenses and lower priced promotional offers for new customers.

NET PROFIT DECLINES

Net profit fell to $201 million, or 20 cents a share, from $371 million, or 32 cents a share, a year earlier. Revenue rose by 7 percent to $4.9 billion.

Analysts had expected profit of 32 cents a share on revenue of $4.95 billion, according to Reuters Estimates.

U.S. monthly churn, the rate at which customers leave, fell to 1.33 percent during the quarter, its lowest rate in 10 years as the company pushes for higher credit quality customers to help counter the impact of the recession and competition from cable TV operators and phone companies.

“They did incredibly well,” said Todd Mitchell, an analyst at Kaufman Bros. “They saw an opportunity with the digital TV transition and problems with Dish and they went for it.”

The company had a total of 18.1 million U.S. subscribers at the end of the quarter, helped by the launch of its joint marketing partnership with AT&T on Feb 1.

Carey also said DirecTV US had benefited from the expected digital TV transition originally scheduled by the U.S. government for Feb 17, but now delayed until June 12.

Average revenue per user (ARPU) rose 0.8 percent to $80.35 a month due to more promotional offers for new and existing customers, as well as lower premium movies, pay-per-view and advertising revenues.

The company said it would improve its subscriber acquisition costs and ARPU in the second quarter but lowered its forecast for full-year ARPU growth to the 2 percent to 3 percent range. This was down from a previous outlook of more than 4 percent growth.

The company said it was still on track to generate around $3 billion of cash flow before interest and taxes in 2009.

Carey said on a call with analysts that its share buy back strategy may be uneven in coming months due to limitations related to the Liberty transaction.

DirecTV also added 148,000 net additional customers in Latin America, where monthly churn rose to 1.86 percent.

Shares of DirecTV closed down 1.03 percent at $24.08 on Nasdaq. (Reporting by Yinka Adegoke; Editing by Richard Chang)

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